Quickly following Puerto Rican debt being thrown into bankruptcy after a settlement could not be reached, bond investors are looking to challenge the move in court. Argentina’s debt woes may come to mind as a precedent, but this time it’s different, says a sovereign debt expert.
Argentina’s historic battle over defaulted debt
The Argentine debt battle was one for the history books. After the country defaulted on its bonds and then reached a settlement with investors who agreed to accept less than face value, opportunistic hedge funds bought the debt for a fraction of the cost. Firms such as Elliott Management then proceeded to demand payment in full.
When Argentina would not cede to their demands, Elliott and other bond investors took the unusual step of attempting to go to court and seize the nation’s assets, including attempting to take control of an Argentine naval vessel, the Libertad. This came after a separate investor group attempted to appropriate the president’s private plane – with her inside. The aggressive tactics led into the courtroom, where bond holders were ultimately victorious, forcing Argentina to agree to their terms through a negotiated settlement.
With bond holders in the Puerto Rico situation taking steps to initiate actions in New York court over the Puerto Rican debt, investors are comparing the situation to Argentina, where investors prevailed.
This time it is going to be very different, said UN debt expert and Executive Director of the Jubilee USA Network Eric LeCompte. Causation for the difference is something rarely seen as of late – political bipartisanship.
Puerto Rican debt is different, here’s why
The fighting over Puerto Rican debt, where $70 billion in bonds and $49 billion in pension liabilities is at stake, reached a new milestone this week. That’s not only because it is the biggest municipal bond bankruptcy in history – Detroit was the previous record at $18 billion.
The reason government bond defaults have been unusual is because, in theory, it was assumed governments would raise taxes before forcing investors to take a haircut. But as investors municipal bonds in Stockton, CA and Harrisburg, PA know, investors are at risk. In these cases, they accepted 25 cents and 50 cents on the dollar, respectively after those municipalities were among six in the US to have declared bankruptcy.
But Puerto Rico is different in several respects.
The island bond bankruptcy is also historic because Congress designed a comprehensive bankruptcy process for the US territory to deal with 100% of the island’s debt, according to LeCompte. He notes that if Puerto Rico were a state, they could not? restructure all of their obligations under Chapter 9 protection. Likewise, if it were a sovereign nation certain public sector and Paris club debt are carved out of a debt restructuring.
Immediately following the move, bond investors voiced a desire to take the matter to New York court.
When Congress passed the Puerto Rico rescue law in July of last year, known as PROMESA, it included a “Title III” provisions that sought to “prevent predatory behavior” by creating a method that discouraged investors from buying debt and becoming holdouts after an agreement with investors had been reached.
Nonetheless, the bankruptcy is likely to be challenged on several levels.
PROMESA mandates all parties engage in good-faith negotiations toward an out-of-court settlement and properly disclose material information, including financial statements, which could be one point of the challenge.
Reuters noted certain Puerto Rican agencies still have revealed financial statements, and creditors have complained in court the Puerto Rican oversight board has not done enough to encourage an out of court settlement.
Another point of challenge might be the definition of “essential services,” which the legislation carves out.
LeCompte, however, says the obligations have been met. He considers US law, which was passed with bipartisan support in Congress, to be “air tight.”
“Legislators learned from the Argentine situation when they drafted PROMESA,” LeCompte said, pointing to what he said is likely to become a global model for debt resolution and a culmination of his multi-year fight to establish a consistent system to handle the issue.
This article was updated 5 / 7 / 2017 to reflect the fact Elliott Management did not use force to take control of the Argentine naval vessel and they were not involved in siezing the Argentine Presidential plane.